Anxiety in the Age of Inequality

Why Thomas Piketty’s blockbuster book Capital in the Twenty-First Century struck a nerve in America and beyond.

Until recently, it was a safe assumption that it would be impossibly hard to sell a book by an obscure left-wing French intellectual to Americans, especially a 700-page tome. No longer. This spring Thomas Piketty, a 43-year-old Paris-based economist and expert on wealth and inequality, published Capital in the Twenty-First Century in English. The book compares how wealth patterns have evolved in different countries over the past few centuries and points out that inequality has been rising almost everywhere, including in the United States. Piketty’s academic publisher initially expected to sell only a modest number of copies. But Capital  shot into best-sellers lists. Sales of the book were so high that it even beat out two literary adaptations of Frozen, the hit Disney film. When Piketty appeared at literary events to discuss his work, he attracted such crowds that American media dubbed him a “rock star” economist.

Thomas Picketty

Piketty’s success is a startling sign of how the zeitgeist can sometimes shift—or, more accurately, how the framework for public debate can be reshaped suddenly to make ideas that once seemed almost irrelevant go mainstream. A decade ago, during the heady days of the credit boom, inequality was infrequently discussed with passion outside the ranks of the political left. But in 2014, it became ubiquitous.

When the World Economic Forum held its annual general meeting in Davos, Switzerland, in January, it revealed that a yearly survey of its members had ranked inequality as the biggest challenge stalking the global economy in 2014. It topped climate change and banking crises, among other issues, even though this was the first time inequality had ever appeared in the survey.
Around the same time, an opinion poll by the Pew Research Center showed that two-thirds of Americans think the gap between rich and poor is widening, and a report released in September showed that almost half consider this to be a “very big” problem for their country.

The concern is markedly higher than it was before the 2008 credit crisis.
Policymakers are echoing and reinforcing this focus on inequality.
In October, at a conference in Boston, U.S. Federal Reserve Chair Janet Yellen said, “Inequality in the United States greatly concern[s] me,” before devoting part of her presentation to the topic, which was previously considered largely taboo for central bank governors.

President Barack Obama has also cited the issue repeatedly in his political speeches.
More surprisingly, key voices in the Republican Party have echoed the theme (though they are apt to blame inequality on the poor’s failure to work hard enough, rather than on government policies or certain structural patterns that Piketty identifies).

Worldwide, according to the Factiva database of global press sources, the word “inequality” cropped up 28,000 times in the second quarter of 2014; back in 2006, during the height of the credit boom, the word only appeared 3,000-odd times.

Why has interest in inequality exploded? In part, the trend reflects tangible economic facts: Inequality of incomes and wealth has grown in recent decades.

Back in 1980, according to economist Emmanuel Saez, the top 1 percent of Americans garnered “just” 10 percent of all income; these days, he finds, the ratio is around 22 percent because salaries have become less equal and the wealthy have enjoyed capital gains. This divergence was partially concealed during the credit boom because middle-class Americans borrowed heavily to maintain consumption and offset their stagnant wages. To a certain extent, this was also true in places such as the United Kingdom.

When the bubble burst, however, the divergence was revealed with cruel clarity. Since that time, the climate of ultra-loose monetary policy has further twisted the knife: The Bank of England, for example, calculates that the richest 5 percent of Britons have captured 40 percent of the benefits of quantitative easing since 2009. The pattern in the United States is almost certainly similar, if not more extreme, though the Federal Reserve has not hitherto had the courage to publish comparable research.

But raw numbers alone do not fully explain the new zeitgeist. The shifting debate on inequality also reflects a stealthy change in how the craft of economics is perceived. Back during the credit boom, economics was presumed to be a quantitative field: Anything that really mattered in policy terms, it was thought, could be plugged into a spreadsheet or algorithm. The most important digits pertained to productivity or growth; a big GDP number was considered the holy grail.

These days, however, it is clear that these digits aren’t the only things that matter.
The quality of growth and the distribution of its benefits are important too.
A world that is growing, in economic terms, but doing so in a profoundly unequal manner behaves differently from other, previous models. Think about spending: When most of the gains from wealth are concentrated in the hands of the rich, those individuals’ propensity to spend is different from the pattern that arises when the middle class is enjoying prosperity. Namely, rich people spend a far smaller proportion of their income than poorer families do. To put it crudely, it is harder to reflate an economy on the backs of luxury goods than on those of middle-class cars.

More importantly, the growing gap between the haves and have-nots creates new political risks that cannot be ignored. A recent feature of the political landscape in the Western world has been a rise in anti-establishment parties, be it the Tea Party in the United States, the National Front in France, or even the independence movement in Scotland. These parties and their popularity are born from, among other things, economic distress, emergent forms of local identity, and people’s enhanced ability to organize themselves via social media.
But inequality plays a role too: As the wealth divide widens, it becomes less clear to the poor that they have a stake in preserving the status quo, and mainstream politicians, in turn, struggle to create sensible, long-term trade-off strategies for the economy.

In short, what matters today in economics is not simply data, but questions of social cohesion and trust—or “credit,” in the old-fashioned Latin sense. Traditionally these “soft” issues were considered the preserve of social scientists, not economists. But it is rapidly becoming clear that they are important to economic growth. It is little wonder that many of Wall Street’s largest banks are hiring analysts skilled at discussing cultural and political trends or that ratings agencies such as Standard & Poor’s are placing a new emphasis on “social” factors, such as perceived inequality, when they analyze economic and fiscal risks.

Perhaps this shift in the debate will turn out to be temporary. If Western economies do start to grow again, the anxiety about political risk, cohesion, and credit may seep away. After all, people care less about how a pie is being divided if that pie is expanding fast. But don’t bet on that happening anytime soon.

To understand why, take a look at work by someone whom, unlike Piketty, most pundits do not know: W. Brian Arthur. An economist affiliated with the Palo Alto Research Center and the Santa Fe Institute, Arthur analyzes the impact of digitization on the economy. He estimates that if all the economic activity now performed by digital networks around the world, without any human intervention, were added up, it would soon be equivalent to the economic output of the entire U.S. economy. This activity is replacing a vast swath of middle-class jobs, leaving most gains of growth in the hands of a skilled, highly paid elite—and it is only trending upward, with no end in sight.

Or, to put it another way, to understand why Piketty’s book struck such a chord in 2014, think about how Capital  has been sold. Once upon a time, it would have been retailed predominately by salesclerks staffing bookstores; today it is as likely to be sold online, with just a few low-paid warehouse staff and postal workers handling copies. No wonder anxiety is the new mood of the age.

The genie of inequality cannot be stuffed easily back into the bottle.
Piketty’s book is a reminder that what’s needed, above all else, is an honest debate about another issue that has hitherto been unmentionable, especially in America: a bit more wealth redistribution.

Gillian Tett
Columnist and U.S. managing editor
Financial Times

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